Question

You hire a new assistant production manager whose prior experience is with a company that produced goods to order. Your company engages in continuous production of homogeneous products that go through various production processes. Your new assistant e-mails you questioning some cost classifications on an internal report—specifically why the costs of some materials that do not actually become part of the finished product, including some labor costs not directly associated with producing the product, are classified as direct costs. Respond to this concern via memorandum.

Short answer

The memorandum describes the difference between direct and indirect costs in job order versus process costing.

Step-by-step solution

Meaning of Memorandum

A memorandum in accounting refers to a document containing a brief messagethat should need to be recorded in the general journal and the general ledger account. The message from the note is recorded in the ledger to record changes made to the accounting record.

Writing a memorandum

MEMORANDUM

To:

From:

Subject:The costs of some materials that do not actually become part of the finished product

Since this seems to be the main area of confusion, the main goal of this memo should be to clarify the contrast between estimating direct and indirect costs in a job order against a process cost accounting system.

Points the memorandum should make include:

1. The cause of the assistant's perplexity. The assistant may perform procedures from that point of view, given their previous familiarity with a job order system. The expenditures she identified would have been categorized as indirect product costs from the perspective of a job order.
2. You must highlight that you deploy a completely different approach because your business doesn't constrain production to particular groups of goods but rather routinely manufactures identical goods.
3. It is crucial to understand that the process, not the job, is the cost object. Costs are direct costs if they can be linked to the cost object.

4. Only the materials and labor used in particular tasks are taken as work. Direct costing in work order cost accounting. Manufacturing overhead is the cost of materials and labor that goes into manufacturing but is not specified directly related to any function.

5.The terms "direct cost" and "indirect cost" are used in process cost accounting systems. Direct costs are expenses related to raw materials and labor that are directly related to particular manufacturing processes.

6. In a work order system, some of the costs classified as manufacturing costs may be classified as direct costs in process cost accounting. For example, depreciation of a machine used by only one process is a direct expense of that operation.